It is a well-settled principle of law that parties are allowed to agree on any term and condition they deem necessary to include in their contractual relationship. This is called ‘freedom of contract’. This has received judicial blessings in the case of Cooperative Development Bank Plc v. Arc. Mfon Ekanem and Ors, where the court held that parties to a contract have a freedom to determine the terms of their contract; that the principle of ‘freedom of contract’ enjoins the court to enforce the intention of the parties as demonstrated from the terms of the agreement between them.

Parties, while enjoying this their freedom, automatically have the powers to exclude, exempt or limit the obligations and rights arising from each term – obligations, which ordinarily they are liable for. Parties do this by the insertion of certain clause(s) known as an “Exclusion or Limiting Clause”. The effect of this clause is that parties can avail themselves of liability relying on this clause if there is a breach or a fault from the contract.

Now the nagging question is: “Can parties also rely on this clause to avail themselves of liability for a fundamental breach?”

This question is going to be the basis of this write-up.

Take a sip of your tea, and read on (wink).

First and foremost, what is even a fundamental breach?

What is construed from the two Court of Appeal’s decisions in Karsales v Wallis, and Harbutt’s, Plasticine illustrate that a ‘fundamental breach’ could occur either through the breach of a particularly important term, or through a breach which had the consequences of destroying the whole basis of the contract.

It is pertinent to know the definition of a fundamental term first before we move on to our main business. Below are some judicial responses to the definition of a fundamental term:

“A fundamental term of a contract is a stipulation which the parties have agreed either expressly or by necessary implication or which the general law regards as a condition which goes to the root of the contract so that any breach of that term may at once and without further reference to the fact and circumstances be regarded by the innocent party as a fundamental breach” – Niger Insurance Co. Ltd v. Abed Brothers Ltd (1976) 7 SC 20, Union Bank of Nigeria Plc Vs Sax (Nig) Ltd (1994) 8 NWLR (Pt 361) 150.

“A fundamental term of a contract is that term that forms the core of the contract and essential to its performance and a breach of which destroys the basis of the contract and deprives the other party of substantially the whole benefit which the parties intended that party to receive” – Karsales (Harrow) Ltd Vs Wallis (1956) 2 All ER 866, Hunter Engineering Co Vs Syncrude Canada Ltd (1989) 1 SCR 426, Tercon Contractors Ltd Vs British Columbia (2010) SCC 4.” Per ABIRU, J.C.A. (Pp. 32-33, Paras. C-D)

Main Discussion.

The earlier position of common law as regards this concept was stated by Lord Denning JCA (of a blessed memory) in the two locus clasicus cases of Karsales v Wallis and Harbutt’s Plasticine. The two cases will be analysed briefly below:

Karsales v Wallis.

The contract was for the supply of a Buick car, which the plaintiff had inspected, and found to be in good condition. When delivered (late at night), however, it had to be towed, because it was incapable of self-propulsion. Amongst other things, the cylinder head had been removed, the valves had been burnt out, and two of the pistons had been broken. The defendant purported to rely on a clause of the agreement which stated: “No condition or warranty that the vehicle is roadworthy, or as to its age, condition or fitness for purpose is given by the owner or implied herein.” The county judge held for the defendant, but the Court of Appeal reversed this. The majority of the court (Lord Denning reached the same conclusion, but on slightly different grounds) held that what had been delivered was not, in effect, a ‘car’. The defendant’s ‘performance’ was totally different from that which had been contemplated by the contract (that is, the supply of a motor vehicle in working order). There was, therefore, a breach of a fundamental term of the agreement, and the exclusion clause had no application.

Harbutt’s Plasticine.

The contract involved the supply of pipework in the plaintiff’s factory. The type of piping used was unsuitable, and resulted in a fire which destroyed the whole of the plaintiff’s factory. The obligation to supply piping that was fit for its purpose could clearly have been broken in various ways, not all of which would have led to serious damage to the plaintiff’s premises. In this case, however, the consequences of the defendant’s failure to meet its obligation in this respect were so serious that the Court of Appeal regarded it as a ‘fundamental breach’ of the contract, precluding any reliance on an exclusion clause.

In summary, Lord Denning’s view at the Court of Appeal is that if there is a fundamental breach, the party cannot rely on the exemption clause to deny liability.

These two Court of Appeal decisions illustrate that a ‘fundamental breach’ could occur either through the breach of a particularly important term, or through a breach which had the consequences of destroying the whole basis of the contract, and as such, the party who breached cannot rely on the exclusion clause to deny liability.

This doctrine of non-reliance on the exemption clause for fundamental breach established in the Court of Appeal by Lord Denning is known as the ‘Rule of Law’ doctrine.

However, the House of Lords in Suisse Atlantique Sociétéd’Armemente SA v Rotterdamsche Kolen Centrale NV, rejected Lord Denning’s rule of law doctrine:

Suisse Atlantique.

The case concerned a charter which included provisions whereby if there were delays the charterers’ liability was limited to paying $1,000 per day ‘demurrage’. The owners attempted to argue that the charterer’s breach was so serious that the demurrage clause should not apply, and that they should be able to recover their full losses. The House of Lords rejected this, and in so doing expressed strong disapproval of the argument that there was a substantive rule of law which meant that certain types of breach automatically prevented reliance on an exclusion clause.

The House was of the opinion that the parties should generally be allowed to determine their obligations, and the effect of exclusion clauses in their contract. If there was a breach which appeared fundamental, then it was a question of trying to determine the parties’ intentions as to whether such a breach was intended to be covered by any exclusion clause. Of course, as Lord Wilberforce noted, ‘the courts are entitled to insist, as they do, that the more radical the breach the clearer must be the language if it is to be covered’, but the question is one of the proper construction of the clause, and not a rule of law.

The doctrine of reliance on the exclusion clause for Fundamental Breach was established by the House of Lords in the above case. In principle, the House of Lords stated unambiguously that fundamental breach was a ‘rule of construction’ not a ‘rule of law’. In principle, anything could be excluded so long as the words are clear enough.

Review of Some Nigerian Judicial Responses towards the Effect of Exclusion Clause in Fundamental Breach.

Having analyzed the origin of the doctrine above, vis-à-vis some judicial responses in the United Kingdom, it is crystal clear that there are two positions in the United Kingdom – Lord Denning’s Rule of Law doctrine and House of Lords’ Rule of Construction doctrine. The one thousand and one question then is, which of these two positions have the Nigerian Courts risen to defend?

Read through some Nigerian judicial responses analysed below to learn more.

In the case of Eagles Super Pack (Nigeria) Ltd. v. ACB Plc. (2006) LPELR-980(SC), the Supreme Court held that:

“An exemption clause in a contract may not avail a party who has been guilty of a fundamental breach of the contract. See Chitty on Contract 23 2 Edition para. 732 page 329.” Per TABAI, J.S.C. (P.45, Paras.F-G)

The Supreme Court held that an exemption clause in a contract may not avail a party who has been guilty of a fundamental breach. In this case, the court held that the defendant/respondent is liable for breach of contract and exemption clause can not avail the defendant/respondent. In this same case, the court of Appeal’s decision was set aside by the apex court and it uphold the trial court allowing the claim restored.

The Supreme Court in the case of IMNL v PEGOFOR INDUSTRIES LTD(2005), the apex court reinstated the rule of law principle in Nigeria that an exemption clause will not be available to a party who is in fundamental breach of a contract.

While the two cases given above are over 10-year old cases, there are, of course, recent judicial responses with regards to the doctrine.

In Kaydee Ventures v Hon. Minister of FCT and Ors (2010), The Supreme Court held that:

It is now settled law that in matters of contract, as in the instant case, in. which the terms and .conditions of contract are embodied in a written document, the parties and the court will not be allowed to read into the contract extraneous terms on which they reached no agreement as the court cannot make a contract for the parties. The primary duty of the court in the circumstance is limited to interpretation and enforcement of the terms of the contract as agreed by the parties thereto – See Koiki vs Magnusson (1991 8 NWLR (Pt. 615) 492: Int. Textile Ind. (Nig) Ltd vs. Aderemi (1991 8 NWLR (Pt. 614) 268

In Dakour & Ors. V. Lagos State Urban renewal board & Ors. (2015) LPELR-24806 (CA), the court of Appeal held that in a case of fundamental breach with regards to terms of contract, it will give the innocent party to treat the contract as repudiated.

In the case of Max-clean Becal Ventures Ltd. & Anor v. Abuja Environmental Protection Board (2016), the Court of Appeal, in answering the question as to the effect of an exemption clause on a fundamental breach of contract, held that there is no denying the fact that courts generally seem to be hostile to exclusion or exemption clause because once there is any ambiguity in the clause, it will be construed against the person who is trying to rely on the clause.

In LINTIMA v. IBRAHIM (2017) LPELR-43434(CA), the Court of Appeal held that:

“It is settled that where an agreement has been substantially performed by one of the parties to the agreement, it cannot be rescinded because of failure of that party to fulfill some of its terms unless those unfulfilled terms are fundamental to the agreement” – Olanrewaju Commercial Services Ltd Vs Sogaolu (2015) 12 NWLR (Pt 1473) 311.

The Court of Appeal in the case of AMINU v NWANKWO (2017) LPELR 42802, held that the settled position of law is that an exemption clause can only avail a party if he is carrying out the contract in its essential respect. What that means in essence is that a breach of contract, which goes to the root of the agreement disentitles a party from relying on an exemption clause.

Guaranty Trust Bank v. Motunrayo – Tolulope Aleogena (2019). The case involved the appellant who operates an account in one of Guaranty Trust Bank branches in Lagos, Nigeria on the basis of which she was issued an ATM card. Whilst in the United Kingdom, she used the ATM card in Barclays Bank Machine, in Broadway Stratford, London to withdraw 800 pounds. Her account was debited but the money was not released to her. She immediately made a report and she was informed that investigation was ongoing and a refund would be made within 45 days. She instituted an action claiming the sum of 15,000,000 naira as damages for breach of contract and cost of the action. The bank’s attempt to rely on the limited liability clause stated in the Master Card Chargeback guide met a brick-wall as the Court of Appeal held that an exemption clause cannot avail a party who has been guilty of a fundamental breach of the contract. Having breached the fundamental term to honour the customer’s mandate, the bank could not seek to rely on the exemption clause.

Conclusion.

To Crown it all, construing from the judicial responses analysed above, it is obvious that the Nigerian Supreme Court’s stand on the issue of fundamental breach of contract is in conformity with the theory of rule of law propounded by the Master of rolls Lord Denning which is to the effect that where there is a fundamental breach of a contract, the party guilty of the breach cannot rely on any exclusion clause – no matter how well-crafted – to avail himself of liability.

On this note, I wish to extend my appreciation to my amiable Lecturer Dr. Awwal Magashi and my learning friend Tijani Hadi Onimisi for their excellent contributions to this piece.

Toheeb Mustapha Babalola is a pupil of law, a student of Faculty of Law, Bayero University Kano and he is interested in advocacy, academic writing, legal writing, activism, and plethora of positivism. To reach him, email: [email protected], or contact/WhatsApp: +2348106244073.